AMM (Automated Market Maker)

An Automated Market Maker (AMM) is a system used in decentralized finance (DeFi) that allows users to trade cryptocurrencies directly from their wallets without relying on traditional order books or centralized exchanges. Instead, it uses smart contracts and liquidity pools—collections of tokens provided by users—to facilitate trades automatically. The AMM algorithm determines the price of tokens based on their relative amounts in the pool. When someone trades, the pool adjusts its token quantities, which in turn updates the prices. This process enables continuous, permissionless trading and liquidity provision.